Brent crude slipped towards $123 on Tuesday, reversing earlier gains as investors began a sell-off on worries about demand from slowing economies in China and Europe, though losses were capped by risks to supply from Iran.
Concerns that the euro zone may be facing its second recession in three years and that demand may be hit by China's cut in its 2012 growth target to an eight-year low of 7.5% are weighing on investor sentiment.
Prices had risen earlier on fears of disruptions to supply from Iran, after Israeli Prime Minister Benjamin Netanyahu showed no sign of backing away from possible military action against the OPEC member following a meeting with U.S. President Barack Obama on Monday.
Front-month Brent crude pulled back seven cents to $123.73 a barrel by 0545 GMT, after climbing to a daily high of $124.39. U.S. April crude inched up 10 cents to $106.82.
"Traders seem reluctant to hold positions before this week's spate of important economics data," Ben Taylor, a sales trader with CMC Markets, said in a note on Tuesday.
"Also causing concern is the Greek bondholders' acceptance of the haircut and roll-over into longer dated bonds. If a two-thirds majority acceptance does not occur it's widely believed that the Greek government could force full participation and thus trigger a default."
Greece needs to complete a bond exchange with private holders, scheduled to close on March 8, before a second bailout is paid.
Euro zone private sector surveys showed a sharp downturn in activity at Italian and Spanish businesses dragged the currency bloc back into decline last month. Growth slowed in Germany, the region's biggest and strongest economy, and stalled in France.
While the U.S. services sector expanded in February at its fastest pace in a year, new orders for factory goods dropped in January, data showed.
Investors are also watching for China's industrial output, investment and retail sales data due Friday to see how the world's second-largest economy is weathering the global downturn.
Also providing further bearishness, U.S. crude oil stockpiles are likely to have risen for the third straight week last week, a preliminary Reuters poll of analysts showed on Monday, ahead of a weekly report from the American Petroleum Institute due later on Tuesday.
SUPPLY RISKS
Fears of supply disruptions from Iran and unresolved tension over its nuclear program stemmed the slide in oil prices.
The International Atomic Energy Agency (IAEA) has said there were indications of activities at an Iranian military site its inspectors want to visit as part of a probe prompted by fears Iran may be seeking nuclear weapons capability.
"The supply risk premium to Iran is supporting prices, but the main volatility is from the demand side," said Jeremy Friesen, a commodity strategist at Societe Generale.
"The market has already priced in China's target growth cuts as they know it is trying to ease the economy and people believe China has the capacity to anticipate any unexpected slowdown."
China appears determined to push forward with market-oriented fuel price reforms that would boost prices in the near term, as they are consistent with its aim of restructuring the economy towards more efficient energy use, J.P. Morgan analysts said in a note on Monday.
If consumers believe that price reforms are around the corner, they will tend to hoard crude and products, they said.
"This could add to the precautionary inventory building we may be seeing globally at the secondary and tertiary level due to worries over Iran."
